Wednesday, December 06, 2006

Falling dollar, a field of sunflowers

David Seaton's News Links

Have you ever watched a field of sunflowers on a summer's day as they turn their thousands of heads simultaneously to follow the sun as it moves across the sky? An interesting way of thinking about what appears to be happening to the dollar right now is to compare the behavior of currency traders, great and small to those sunflowers. Each sunflower is an individual, not connected to the other sunflowers, but they react as one to the same stimulus. You could even say that sunflowers are more individualistic than financiers, as, unlike the currency traders, the sunflowers don't talk to each other. Just like the sunflowers the traders are moved by a common stimuli: the flowers moved by the sun, the traders moved by profit. The sun of course is much more dependable than profit. Therein the calm of the flowers and the agitation of the traders. The traders are torn between two "suns": one sun is the hope that the dollar will not crash and destroy huge chunks of wealth in the form of dollar valued assets and the other sun is the desire not to be the last one out of door if the dollar does begin to fall sharply. The traders will all stand firm as one to defend value and all rush for the door as one to avoid losing their shirts. The movement will be much brusquer than the stately sway of the sunflowers on a summer's day. We'll have to switch our metaphor to lemmings then. DS

When the Dollar Talks Back - Editorial - New York TimesAbstract: Growth and relatively high rates — if they came to pass — would be a good combination for the dollar. But as of yesterday, the dollar hadn’t moved up much from its recent lows against other major currencies. Investors remain largely focused on economic weakness in the United States and gathering strength in Europe — which portend a weaker dollar, no matter what anyone says. A weaker currency is inevitable for a country as indebted as the United States is. During the Bush years, deficits have mushroomed — in the federal budget and in trade. Anything that affects foreign investors’ willingness to finance enormous deficits pushes the dollar down — including better investment opportunities elsewhere, as there are now. The great unknowables are the timing and steepness of a sustained dollar decline. Over the past few years, investors who bet on a weakening dollar have lost money. But the current swoon is a reminder that no nation, even the United States, can borrow forever without facing up to economic consequences. The government has been assuming — correctly, so far — that the United States is too big to fail. Administration officials seem confident that the Chinese, in particular, will continue to finance the nation’s deficits, because doing so helps their exports. They also assume that China and other countries won’t sell off chunks of their huge dollar holdings, lest they drive the dollar down, and with it, the value of their remaining dollar-based assets. That’s more like a standoff than stability, and it puts way too much of the nation’s well being in the hands of foreign central bankers. But it’s the best the Bush crowd has had to offer, because true stability in global finance is grounded in fiscal responsibility at home, something the administration lacks. READ IT ALL